How to Choose a Life Insurance Policy

Learn how much you need, plus the pros and cons

Choosing a life insurance plan takes a lot of time and energy. It can also feel hard on an emotional level.

The process forces us to think about something we really don’t want to happen. Life insurance is there to protect your loved ones once you die. Thinking about that outcome is hard for most people.

Then, of course, there are all the different options to consider, plus add-ons and extra costs. There are a lot of small choices involved in picking a plan. And which plan you choose can have high stakes for the loved ones you leave behind.

In 2020, only 54% of adults had some form of life insurance. That's down 9% over the last decade. For the other 48%, their family and loved ones might be left without a way to pay for things like funeral costs or debt if the worse happens.

Life insurance can help you and your family be prepared. Want to get the protection you need? Learn the basics about how to choose a life insurance policy without breaking the bank.

What Is Life Insurance?

Life insurance is a contract between you and an insurance company. You agree to pay a monthly or yearly premium. In return, the insurance company commits to paying a set amount of money to the person or people you choose after you die. 

The money the insurance company agrees to pay is known as the death benefit. The person who receives the money is called the beneficiary.

Why Should I Get Life Insurance?

The main reason to get life insurance is to protect your family after you die. The payment provides them with an immediate income that they can use in a variety of ways.

This could be for their basic living expenses. It might also be for a number of costs related to your death and funeral, or any other purpose that you choose and state in your will.

Costs After You Die

Life insurance is often used to pay for funeral expenses. It might also be used for medical bills, student debt, estate taxes, or other debts remaining after your death.

Having life insurance means that your family doesn't have to worry about how to pay these costs.

Provide for Living Expenses

If your family relies on your income, your plan can cover replace that income for a set amount of time. How long depends on how much coverage you have.

If you have children, you can also choose who will be their guardian after your death. Your life insurance payout can then be used to provide for the costs of raising your children. This might include basic living expenses, medical costs, or tuition for college.

Leave Money to Different Causes

You can choose how you would like your life insurance to be divided up. It doesn't all have to go to a single person, or even all to your spouse and children.

You can choose to leave an inheritance to people you love, not just a spouse or children. You might also decide that some should be donated to a charity, provide funds for college, or pay off your mortgage.

Build Wealth

Some types of life insurance can be used as investment options. These can help you and your loved ones build wealth.

You can also transfer wealth and take advantage of certain tax breaks for your beneficiary. Life insurance can provide many tax-free advantages.

Secure Debt

If you have a life insurance plan when you take on certain types of debt, your lender may want you to use your plan as security. For example, this can be done with a mortgage.

Types of Life Insurance Policies

There are two main types of life insurance. These are term life insurance and permanent life insurance.

What Is Term Life Insurance?

With term life insurance, you buy a policy for a set length of time. This is known as the term.

The term is often between 10 and 30 years. Within that time, though, you can change the term. If you buy a plan for 10 years, you can decide four years later that you want to extend it to 30.

Term life insurance has no cash value. It expires at the end of the term unless it is "convertible." This is the option with the lowest cost.

What Is Permanent Life Insurance?

With permanent life insurance, the length of the policy is for life. Some companies may also offer permanent plans to age 65. There are two different types of permanent life insurance.

Whole life insurance has a set premium. The plan is valid as long as you keep paying the premiums.

Whole life insurance builds up a cash value over time. If you surrender the policy, that cash value can be returned to you.

Universal life insurance offers investment options. The premiums you pay may change over time based on how you decide to manage your plan.

Factors that can impact how much you pay include your investments, cash values, and other options. You can, for example, borrow from this kind of life insurance policy.

People often choose between one type of life insurance policy or another, but you don't have to. You may want to use both types of plans. For example, it may be a better choice to use both term and permanent life insurance because your needs will vary as you age.

Convertible or Combination Life Insurance

Combination life insurance policies are slightly different than both term and permanent. These plans give you options to have a payout in circumstances other than just death.

More people are choosing a life insurance policy that combines with other coverage, such as long-term care insurance. In fact, a 2019 study by Life Happens and LIMRA found that one in five Americans stated they would be very to extremely likely to buy a combination product.

Convertible life insurance policies allow you to start off with a term life insurance policy and convert it to a whole life policy. Instead of losing the policy at the end of the term, it would change to a new one.

This may prevent you from having to take a medical exam at an older age when you convert to a whole life insurance plan. 

Pros and Cons of Life Insurance

Pros
  • Financial security and peace of mind for your family or spouse

  • Beneficiary can use the funds from life insurance as they need

  • Fixed premiums so you know what to expect in your budget

  • Some plans let you build savings through investments or borrow money from the life insurance policy later in life if needed

Cons
  • For term life, after the term is up if the death benefit is not paid, any money paid into the policy is lost

  • For whole life with cash values or universal life, investment options do not yield returns as high as other assets

  • Plans are cancelled if you don't pay the premium, which means you have to take out a new plan that may cost more

How Much Life Insurance Do I Need?

People buy life insurance for many reasons. How much you need will depend on why you are buying it.

If you want to provide an income for your family in case you die unexpectedly, then your current lifestyle and spending will impact how much you need.

For example, how much money would your family need per year to replace your lost income? If your income was $75,000 you may want that much, plus some extra to cover funeral costs or a child's school expenses.

Keep in mind that when you are alive, part of your income goes to your own needs. Your family won't need to replace those costs if you are no longer with them


If you want to replace your income, there isn't a simple answer. Every family's needs are different. Ask yourself these questions to decide how much you need.

  • How many years of income do you need to provide?
  • If you have a spouse, would they work after your death? How much would they earn, and how long will they work?
  • Do you need to provide money for school or college?
  • How much debt do you have? Do you want to cover this in your life insurance?
  • Will your plan be used to pay your loans, medical bills, or mortgages?
  • What would your family’s expenses be as a result of your death? Will you need to pay for funeral expenses or the cost of hired help at home?
  • What investments and savings do you have now?

If you have children, you will also want to think about what their expenses will be until they are eighteen (or beyond, if you think they will go to college). If someone other than a spouse will be in charge of their care, having enough insurance to cover these costs will make it easier for the new guardians to take on raising your children.

Your life insurance needs will change over time as your life changes. Review your coverage every few years, or every time you have a big life change, to make sure you have the right plan.

How Much Does Life Insurance Cost?

Life insurance costs vary on the type of plan you have and how much the death benefit is. Costs can be as low as a few dollars a month or as high as several hundred.

Most life insurance companies offer different payment options to help make payments affordable. However, many people overestimate the cost of life insurance. This may be part of the reason so many people hesitate to get it.

A life insurance professional or financial advisor can help you decide how much coverage you will need. They can also recommend ways to keep your monthly or yearly costs down if you are worried about paying too much in premiums.

The cost of life insurance will depend on:

  • Your age
  • Your medical conditions or health, including if you are a smoker or not

You may have to pass a medical exam to be eligible for life insurance. The results of this exam can impact your costs.

  • The amount of the death benefit
  • The term of insurance: permanent life insurance has much costs than term life
  • If the policy has a cash value or not

Overall, the younger you are and the better your health, the less expensive life insurance is.

Key Takeaways

  • Your age, personal needs, and budget will dictate what kind of life insurance coverage is best for you.
  • Term life insurance can be used for short-term needs in combination with convertible or permanent life insurance to save money.
  • Always review your life insurance choices every few years or when you go through major life changes, including the amount of the death benefit and who the beneficiaries are.
  • Talking to a professional when you choose your life insurance plan can help you find ways to afford the right kind of coverage at a cost you can afford.